Exercise 9-16 The Blue Spruce Company is planning to purchase $496,800 of equipment with an estimated seven-year life and no estimated salvage value. The company has projected the following annual cash flows for the investment. Year Projected Cash Flows 1 $202,000 2 152,000 3 105,000 4 50,400 5 50,400 6 42,500 7 42,500 Total $644,800 (a) Calculate the payback period for the proposed equipment purchase. Assume that all cash flows occur evenly throughout the year. Payback period years and months. (b) If Blue Spruce requires a payback period of three years or less, should the company make this investment? The company shouldshould not make this investment.
Exercise 9-16 The Blue Spruce Company is planning to purchase $496,800 of equipment with an estimated seven-year life and no estimated salvage value. The company has projected the following annual cash flows for the investment. Year Projected Cash Flows 1 $202,000 2 152,000 3 105,000 4 50,400 5 50,400 6 42,500 7 42,500 Total $644,800 (a) Calculate the payback period for the proposed equipment purchase. Assume that all cash flows occur evenly throughout the year. Payback period years and months. (b) If Blue Spruce requires a payback period of three years or less, should the company make this investment? The company shouldshould not make this investment.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Exercise 9-16
The Blue Spruce Company is planning to purchase $496,800 of equipment with an estimated seven-year life and no estimated salvage value. The company has projected the following annual cash flows for the investment.
(a) Calculate the payback period for the proposed equipment purchase. Assume that all cash flows occur evenly throughout the year.
(b) If Blue Spruce requires a payback period of three years or less, should the company make this investment?
| Year | Projected Cash Flows | |||
| 1 | $202,000 | |||
| 2 | 152,000 | |||
| 3 | 105,000 | |||
| 4 | 50,400 | |||
| 5 | 50,400 | |||
| 6 | 42,500 | |||
| 7 | 42,500 | |||
| Total | $644,800 |
(a) Calculate the payback period for the proposed equipment purchase. Assume that all cash flows occur evenly throughout the year.
| Payback period |
|
(b) If Blue Spruce requires a payback period of three years or less, should the company make this investment?
| The company
shouldshould not
|
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